1981 (9) TMI 97 - HC - Income Tax

High Court clarifies tax situs for non-resident UK company in India under Income Tax Act

The High Court of Bombay determined the situs of a contract for profit taxation assessment under the Income Tax Act, 1961. The Court affirmed the ... Income Issues:Interpretation of contract situs for profit taxation assessment under the Income Tax Act, 1961.Detailed Analysis:The High Court of Bombay was tasked with determining the situs of a contract for profit taxation assessment under the Income Tax Act, 1961. The case involved an agreement between an Indian company, Kirloskar Oil Engines Ltd. (KOEL), and a non-resident UK company, Glacier Metal Ltd., for the sale of bearing materials. The agreement stipulated that KOEL had the exclusive right to purchase bearing materials made by Glacier in India. The Income Tax Officer (ITO) estimated a profit of 2 1/2% net accrued to Glacier in India from these sales and taxed it for the assessment years 1963-64 to 1968-69. The ITO's decision was based on a previous Tribunal ruling that attributed profit to Glacier in India. The assessee contended that no profit accrued to Glacier in India on the material sales. The Assistant Commissioner (AAC) accepted the assessee's fresh evidence and concluded that no profit was taxable on the purchases made by KOEL from Glacier. The AAC's decision was based on a thorough examination of documents, including invoices and correspondence, which indicated that the transactions were between principal parties and the payments were made in England, not India.The revenue appealed the AAC's decision to the Tribunal, which found that the earlier Tribunal's ruling was based on incomplete evidence. The Tribunal rejected the department's argument that the contract between KOEL and Glacier constituted a sale contract concluded in India. The Tribunal emphasized that the clause in the agreement regarding material supply did not independently constitute a sale contract, as KOEL had the right to purchase from other sources under certain conditions. The Tribunal upheld the AAC's decision, stating that the contract's wording and the operational details showed that the sale of material occurred between principal parties and the situs of the contract was outside India.The High Court affirmed the Tribunal's decision, emphasizing that the clause in the agreement did not establish an independent sale contract between KOEL and Glacier. The operational procedures demonstrated that the material purchases were conducted as typical business transactions, with orders placed in England and payments made there. Consequently, the Court ruled in favor of the assessee, concluding that no profit accrued to Glacier in India from the material sales.